EBay’s Skype IPO Bungled?

An ugly custody battle over the underlying code in Skype is the latest development in the loveless marriage between eBay and the founders of the Internet phone company.

EBay (NASDAQ: EBAY) is trying to replace technology used to run Skype with new software of its own. The move appears to be an attempt to skirt an unresolved licensing dispute that could block future plans to spin off the VoIP subsidiary.

EBay bought Skype in 2005, for a whopping $2.6 billion, but the acquisition didn’t include peer-to-peer networking technology that powers Skype. Rather, that’s owned by a company called Joltid, formed by the founders of Skype. Joltid licenses it to eBay-owned Skype and the two are currently locked in a legal battle over the licensing agreement.

When eBay scooped up Skype, the premise was that buyers and sellers would use it to connect during online transactions, but that never happened. EBay recently admitted it wasn’t a complementary fit and announced an IPO for early next year.

The move by eBay to swap out the Skype code may be designed as a workaround to an ongoing licensing dispute with Skype’s founders, Niklas Zennstrom and Janus Friis of Joltid, who are attempting to terminate the licensing agreement saying Skype breached its contract.

After Zennstrom and Friis created Joltid, the firm sued Skype over the issue of core peer-to-peer technology used for the VoIP service. EBay-owned Skype filed a counter suit in April. The next hearing is slated for June 2010, which could put a damper on any plans to sell Skype in an IPO.

“We have no comment on the litigation beyond our 10-Q disclosure,” Brian O’Shaughnessy, head of global communications at Skype, told InternetNews.com.

EBay and Joltid did not return calls for comment.

A risky maneuver

“Skype has begun to develop alternative software to that licensed through Joltid,” according to eBay’s 10-Q filing with the Securities and Exchange Commission.

Meanwhile, even eBay is calling the Skype code-swap risky.

“However, such software development may not be successful, may result in loss of functionality or customers even if successful, and will in any event be expensive. If Skype was to lose the right to use the Joltid software as the result of the litigation, and if alternative software was not available, Skype would be severely and adversely affected and the continued operation of Skype’s business as currently conducted would likely not be possible,” says the eBay 10-Q filing.

In April, eBay executives outlined high hopes for Skype as a stand-alone business and publicly admitted there was no synergy to be had by folding it into its e-commerce operations. In 2008, Skype had sales of $551 million, and 405 million registered users, but eBay expects it to top $1 billion in revenue by 2011, nearly double of last year.

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